You’ve decided to buy a home and you’ve done all your homework and made your offer. Maybe you’re still thinking about buying a new home. Either way, you’re likely bound for a first time home buyer status. But before you can close escrow on your new home, you’re going to have to buy a home insurance policy. Insurance is normally outside the home purchase process. Your real estate agent or lender may provide a referral to an insurance agent, but ultimately, selecting a home insurance company is up to you. You will be the person who is ultimately responsible to select the coverage for your new home that is adequate to protect your property, its detached structures, personal property and liability.
The answer is short and simple, yes. When you buy a new home you will be required to show evidence of homeowners insurance (frequently called fire insurance by lenders) before you’re loan is funded and you get the keys. In fact, your lender will contractually require you to carry home insurance, so you’ll be required to maintain adequate home insurance until your home is paid in full.
That being said, if you’re going to buy your home with cash or an unsecured line of credit, the requirement for home insurance will likely be waived. Additionally, unlike auto insurance, home insurance isn’t mandated by state regulation. That being said, like a lender requiring insurance to secure their lien you should consider buying home insurance to protect the equity in your home.
At some point in the escrow process, you’ll be advised when to provide homeowners insurance. But you don’t need to wait, you can start shopping as soon as you have agreement with a seller to buy your new home. When you shop early you’ll have more time to ask questions which will improve ability to select the right policy and find savings.
It’s likely that your realtor or lender will have a referral to an insurance agent or company if you ask. This is not a bad place to start shopping. Just be sure that you are being allowed to compare prices, coverages and benefits before you make your final selection. You can often save money by bundling homeowners and auto insurance with the same insurer. You may also want to call your current car insurance agent or company, they may also provide home insurance.
1. Select the right limits for your personal property and liability coverage
Things like clothing, furniture, electronics, and jewelry, basically your personal possessions, have a dedicated coverage called “personal property” and the coverage limits is found on the quote or declarations under Coverage C. This coverage is typically a percentage of the dwelling coverage, but it is frequently modifiable. You need to review for accuracy. Make sure the limit is sufficient to cover all your personal property. If some of your possessions are expensive, ask if there is a “sub-limit” for the item as many policies have limits for some personal property. Additionally, if you own expensive art, jewelry, rugs or silverware, you may need to a personal article floater or to itemize the property on a rider to get proper coverage for these items.
Liability coverage, or Coverage E, provides protection if you’re liable for an incident that injures someone. Make sure you select a liability limit that properly covers the total sum of your assets. It is easy to select a lower limit, like $300,000, but this coverage is relatively less expensive and it’s good to go higher. Most home insurance policies will have a max of $500,000 for your liability limit. But that’s OK. If you need more liability coverage, you can buy an umbrella insurance policy, which provides extra liability protection for both your home, personal and auto exposures.
2. Ask about policy exclusions
Depending on where own your home there will be different types of hazards that your insurance policy simply won’t won’t cover. These exclusions typically relate to natural, potentially catastrophic, weather events and frequently include earthquakes, landslides, mudflows, and flooding.
If your home is in a high risk area for one of these hazards, and they aren’t covered on your home insurance policy, ask your insurance agent or company about options available to cover these risks. There are dedicated policies for flooding and earthquake that can provide you the type of protection you’ll need.
3. Understand your deductibles
When you’re a first time home buyer, you’re also a first time home insurance consumer. You won’t always know the specifics, but the deductible you select is a very important value. So, when buying your first home insurance policy, pay special attention to the deductible for property damage. The deductible will be the portion of a property claim you will be responsible to pay. This means you need to select a value that fits into your budget.
You will likely be familiar with how your car insurance deductible works, so start with this understanding. However, unlike your car insurance, some policies use a percentage. That percent may be calculated off of the replacement value of the dwelling and will get very expensive if you set it too high. In some cases, a home policy may include a “split” deductible. This means you will have a set dollar amount for most claims, but a percentage may apply for wind damage or other select hazards.
SPLIT DEDUCTIBLE EXAMPLE:
After a storm your home sustains wind damage and the claim to repair the damage is $10,000. If the dwelling coverage of your home is $200,000, and the wind portion of the deductible is 2%, then the policyholder is responsible for $4000 (at 2% of dwelling amount) of the damage, even if the all other perils portion of the deductible was set to $1,000.
Many first time home buyers place their home insurance premiums in escrow, sometimes referred to as impound accounts. These types of accounts hold your premium funds, as well as your property tax monies, in trust. The annual value of your home insurance and property taxes are amortized for monthly payments, and that value is added to your mortgage payment each month. Your lender/mortgage servicer keeps these extra funds in an escrow account.
At the time when your home insurance and property taxes are due, your lender will pay bills for your directly from the escrow account. Escrow accounts can be a convenient way ensure you stay up to date with your home insurance premiums and property taxes. When you purchase your home insurance policy, simple instruct your insurance agent or company of your request to pay via escrow, and using the information provided through your lender, the policy will be setup appropriately so the mortgage servicing agent receives the bills for payment. Typically, the policyholder will receive a courtesy copy to know when payment is due.
If your loan is financed by the Federal Housing Administration (FHA), you will be required to have an escrow account. Conventional loans normally make this service optional. However, if your mortgage amount is in excess of your property’s value by 80%, some lenders may contractually require an escrow account for insurance and taxes.
If you elect to pay your premiums outside of escrow, your policy will behave like any other policy and cancel for non-payment of premiums if you don’t remit payment timely. So, make sure you understand that you will have monthly or annual premiums due to avoid costly cancellations and lender placed insurance hassles. Additionally, paying premiums outside escrow is not difficult and will have easy and flexible payment options, including monthly installments. To make sure your policy is paid timely, it is highly recommended you pay your premiums through automatic, electronic payments like EFT or Credit Card.
Yes. When your buy your home, the lender will mandate that the first term of your home insurance to be fully paid at closing. Additionally, if you’re setup in an escrow account, your lender will likely collect 10% to 20% of your annual home insurance premium in your closing costs and deposit the funds into the escrow account for the next billing cycle. If you are paying for insurance outside of escrow, then you will have to pay the entire first year’s home insurance premium at the time of or prior to closing. Typically, there is a hybrid of the two processes, many insured elect to pay premium outside of escrow, but he first year is funded from the closing costs. If you put your insurance agent in contact with your lender and escrow officer, they can work in conjunction to get this done for you.
If your down payment is less than 20%, most lenders will require you to pay private mortgage insurance (PMI). The difference between PMI and homeowners insurance is that PMI is a safeguard for your lender and doesn’t insure your property in any way.
It is getting more popular to see mechanical breakdown endorsements on home insurance polices, but it’s not a typical coverage, and not offered by all insurance carriers. Under normal circumstances, your home insurance policy does not cover normal wear and tear or mechanical breakdowns. However, when you purchase your home you will likely have purchased a home warranty, this is expressly designed to supplement your home insurance in case appliances breakdown around the house. For instance, if your HVAC unit stops working, a home warranty plan can pay to repair or replace it. Home warranties cover nearly all home appliances and are purchased separately from your home insurance.
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